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PROJECT REPORT ON
“A Study on Functioning of Foreign Exchange Market”
Submitted to
University of Mumbai
In Partial Fulfillment of the Requirement
For
M.Com (Accountancy) Semester II
In the subject
Economics
By
Name of the student : - Vivek ShriramMahajan
Roll No. : - 14 -7288
Name and address of the college
K. V. Pendharkar College
Of Arts, Science & Commerce
Dombivli (E), 421203
APRIL 2015

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DECLARATION
I VIVEK SHRIRAM MAHAJAN Roll No. 14 – 7288, the student of
M.Com (Accountancy) Semester II (2015), K. V. Pendharkar College,
Dombivli, Affiliated to University of Mumbai, hereby declare that the
project for the subject Strategic Management of Project report on “A Study
on Functioning of Foreign Exchange Market” submitted by me to
University of Mumbai, for semester II examination is based on actual work
carried by me.
I further state that this work is original and not submitted anywhere else for
any examination.
Place : Dombivli
Date:
Signature of the Student
Name: - Vivek Shriram Mahajan
Roll No: - 14 -7288

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ACKNOWLEDGEMENT
It is a pleasure to thank all those who made this project work
possible.
I Thank the Almighty God for his blessings in completing this task.
The successful completion of this project is possible only due to
support and cooperation of my teachers, relatives, friends and well-
wishers. I would like to extend my sincere gratitude to all of them.
I am highly indebted to Principal A.K.Ranade, Co-ordinater
P.V.Limaye, and my subject teacher Ms. Neha Salagare for their
encouragement, guidance and support.
I also take this opportunity to express sense of gratitude to my
parents for their support and co-operation in completing this
project.
Finally I would express my gratitude to all those who directly and
indirectly helped me in completing this project.
Name of the student
Vivek Shriram Mahajan

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Table of Contents:
CHAPTER No Topic Page no
CHAPTER 1 Introduction
Introduction to Subject………………………..
Introduction to Foreign Exchange…………
5
6
CHAPTER 2 Types of Exchange Rate
Fixed Exchange Rates………………….
Floating Exchange Rates........................
8
8
CHAPTER 3 Functions of ForeignExchange Market
Transfer Function ………......……………….........
Credit Function.....……………………...…...........
Hedging Function...................................................
10
10
10
CHAPTER 4 ForeignExchange Markets in India
A brief background on Foreign Exchange Market.......
Regulation of cross-border currency flows...............
The Dynamics of Swelling Reserves.........................
Enforcement of Foreign Exchange Market................
12
16
17
18
CHAPTER 5 Conclusion
Conclusion………………………………….. 34
Bibliography…………………………………………. 35

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CHAPTER 1: Introduction
Introduction to Subject
During 2003-04 the average monthly turnover in the Indian foreign exchange market
touched about 175 billion US dollars. Compare this with the monthly trading volume of
about 120 billion US dollars for all cash, derivatives and debt instruments put together in
the country, and the sheer size of the foreign exchange market becomes evident. Since
then, the foreign exchange market activity has more than doubled with the average
monthly turnover reaching 359 billion USD in 2005-2006, over ten times the daily
turnover of the Bombay Stock Exchange. As in the rest of the world, in India too, foreign
exchange constitutes the largest financial market by far.
Liberalization has radically changed India’s foreign exchange sector. Indeed the
liberalization process itself was sparked by a severe Balance of Payments and foreign
exchange crisis. Since 1991, the rigid, four-decade old, fixed exchange rate system
replete with severe import and foreign exchange controls and a thriving black market is
being replaced with a less regulated, “market driven” arrangement. While the rupee is
still far from being “fully floating” (many studies indicate that the effective pegging is no
less marked after the reforms than before), the nature of intervention and range of
independence tolerated have both undergone significant changes. With an overabundance
of foreign exchange reserves, imports are no longer viewed with fear and skepticism. The
Reserve Bank of India and its allies now intervene occasionally in the foreign exchange
markets not always to support the rupee but often to avoid an appreciation in its value.
Full convertibility of the rupee is clearly visible in the horizon. The effects of these
development s are palpable in the explosive growth in the foreign exchange market in
India.

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Introduction to Foreign Exchange
Definition
The exchange of one currency for another, or the conversion of one currency into another
currency. Foreign exchange also refers to the global market where currencies are traded
virtually around-the-clock. The term foreign exchange is usually abbreviated as "forex"
and occasionally as "FX."
INVESTOPEDIA EXPLAINS 'FOREIGN EXCHANGE'
Foreign exchange transactions encompass everything from the conversion of currencies
by a traveler at an airport kiosk to billion-dollar payments made by corporate giants and
governments for goods and services purchased overseas. Increasing globalization has led
to a massive increase in the number of foreign exchange transactions in recent decades.
The global foreign exchange market is by far the largest financial market, with average
daily volumes in the trillions of dollars.
As Kindle-Berger put, “the foreign exchange market is a place where foreign moneys are
bought and sold.” Foreign exchange market is an institutional arrangement for buying
and selling of foreign currencies. Exporters sell the foreign currencies. Importers buy
them.
The foreign exchange market is merely a part of the money market in the financial
centres. It is a place where foreign moneys are bought and sold. The buyers and sellers of
claim on foreign money and the intermediaries together constitute a foreign exchange
market.
It is not restricted to any given country or a geographical area. Thus, the foreign
exchange market is the market for a national currency (foreign money) anywhere in the
world, as the financial centres of the world are united in a single market.
There is a wide variety of dealers in the foreign exchange market. The most important
among them are the banks. Banks dealing in foreign exchange have branches with
substantial balances in different countries. Through their branches and correspondents,
the services of such banks, usually called “Exchange Banks,” are available all over the
world.
These banks discount and sell foreign bills of exchange, issue bank drafts, effect
telegraphic transfers and other credit instruments, and discount and collect amounts on
the basis of such documents. Other dealers in foreign exchange are bill brokers who help
sellers and buyers in foreign bills to come together. They are intermediaries and unlike
banks are not direct dealers.

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Acceptance houses are another class of dealers in foreign exchange. They help effect
foreign remittances by accepting bills on behalf of customers. The central bank and
treasury of a country are also dealers in foreign exchange. Both may intervene in the
market occasionally.
Today, however, these authorities manage exchange rates and implement exchange
controls in various ways. In India, however, where there is a strict exchange control
system, there is no foreign exchange market as such.

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CHAPTER 2: Types of Exchange Rate
An exchange rate is the rate at which one currency can be exchanged for another. In
other words, it is the value of another country's currency compared to that of your own. If
you are traveling to another country, you need to "buy" the local currency. Just like the
price of any asset, the exchange rate is the price at which you can buy that currency. If
you are traveling to Egypt, for example, and the exchange rate for U.S. dollars is 1:5.5
Egyptian pounds, this means that for every U.S. dollar, you can buy five and a half
Egyptian pounds. Theoretically, identical assets should sell at the same price in different
countries, because the exchange rate must maintain the inherent value of one currency
against the other.
Fixed Exchange Rates
There are two ways the price of a currency can be determined against another. A fixed, or
pegged, rate is a rate the government (central bank) sets and maintains as the official
exchange rate. A set price will be determined against a major world currency (usually the
U.S. dollar, but also other major currencies such as the euro, the yen or a basket of
currencies). In order to maintain the local exchange rate, the central bank buys and sells
its own currency on the foreign exchange market in return for the currency to which it is
pegged.
If, for example, it is determined that the value of a single unit of local currency is equal to
US$3, the central bank will have to ensure that it can supply the market with those
dollars. In order to maintain the rate, the central bank must keep a high level of foreign
reserves. This is a reserved amount of foreign currency held by the central bank that it
can use to release (or absorb) extra funds into (or out of) the market. This ensures an
appropriate money supply, appropriate fluctuations in the market (inflation/deflation) and
ultimately, the exchange rate. The central bank can also adjust the official exchange rate
when necessary.
Floating Exchange Rates
Unlike the fixed rate, a floating exchange rate is determined by the private market
through supply and demand. A floating rate is often termed "self-correcting," as any
differences in supply and demand will automatically be corrected in the market. Look at
this simplified model: if demand for a currency is low, its value will decrease, thus
making imported goods more expensive and stimulating demand for local goods and
services. This in turn will generate more jobs, causing an auto-correction in the market. A
floating exchange rate is constantly changing.

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In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can
also influence changes in the exchange rate. Sometimes, when a local currency reflects its
true value against its pegged currency, a "black market" (which is more reflective of
actual supply and demand) may develop. A central bank will often then be forced to
revalue or devalue the official rate so that the rate is in line with the unofficial one,
thereby halting the activity of the black market.
In a floating regime, the central bank may also intervene when it is necessary to ensure
stability and to avoid inflation. However, it is less often that the central bank of a floating
regime will interfere.

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CHAPTER 3: Functions of ForeignExchange Market
1. To transfer finance, purchasing power from one nation to another. Such transfer is
affected through foreign bills or remittances made through telegraphic transfer. (Transfer
Function).
2. To provide credit for international trade. (Credit Function).
3. To make provision for hedging facilities, i.e., to facilitate buying and selling spot or
forward foreign exchange.
1. Transfer Function
The basic function of the foreign exchange market is to facilitate the conversion of one
currency into another, i.e., to accomplish transfers of purchasing power between two
countries. This transfer of purchasing power is effected through a variety of credit
instruments, such as telegraphic transfers, bank draft and foreign bills.
In performing the transfer function, the foreign exchange market carries out payments
internationally by clearing debts in both directions simultaneously, analogous to domestic
clearings.
2. Credit Function
Another function of the foreign exchange market is to provide credit, both national and
international, to promote foreign trade. Obviously, when foreign bills of exchange are
used in international payments, a credit for about 3 months, till their maturity, is required.
3. Hedging Function
A third function of the foreign exchange market is to hedge foreign exchange risks.
Hedging means the avoidance of a foreign exchange risk. In a free exchange market
when exchange rate, i. e., the price of one currency in terms of another currency, change,
there may be a gain or loss to the party concerned. Under this condition, a person or a
firm undertakes a great exchange risk if there are huge amounts of net claims or net
liabilities which are to be met in foreign money.
Exchange risk as such should be avoided or reduced. For this the exchange market
provides facilities for hedging anticipated or actual claims or liabilities through forward
contracts in exchange. A forward contract which is normally for three months is a
contract to buy or sell foreign exchange against another currency at some fixed date in
the future at a price agreed upon now.

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No money passes at the time of the contract. But the contract makes it possible to ignore
any likely changes in exchange rate. The existence of a forward market thus makes it
possible to hedge an exchange position.
Foreign bills of exchange, telegraphic transfer, bank draft, letter of credit, etc., are the
important foreign exchange instruments used in the foreign exchange market to carry out
its functions.

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CHAPTER 4: ForeignExchange Markets in India
Foreign Exchange Markets in India – a brief background
The foreign exchange market in India started in earnest less than three decades ago when
in 1978 the government allowed banks to trade foreign exchange with one another. Today
over 70% of the trading in foreign exchange continues to take place in the inter-bank
market. The market consists of over 90 Authorized Dealers (mostly banks) who transact
currency among themselves and come out “square” or without exposure at the end of the
trading day. Trading is regulated by the Foreign Exchange Dealers Association of India
(FEDAI), a self regulatory association of dealers. Since 2001, clearing and settlement
functions in the foreign exchange market are largely carried out by the Clearing
Corporation of India Limited (CCIL) that handles transactions of approximately 3.5
billion US dollars a day, about 80% of the total transactions.
The liberalization process has significantly boosted the foreign exchange market in the
country by allowing both banks and corporations greater flexibility in holding and trading
foreign currencies. The Sodhani Committee set up in 1994 recommended greater freedom
to participating banks, allowing them to fix their own trading limits, interest rates on
FCNR deposits and the use of derivative products.
The growth of the foreign exchange market in the last few years has been nothing less
than momentous. In the last 5 years, from 2000-01 to 2005-06, trading volume in the
foreign exchange market (including swaps, forwards and forward cancellations) has more
than tripled, growing at a compounded annual rate exceeding 25%. Figure 1 shows the
growth of foreign exchange trading in India between 1999 and 2006. The inter-bank
forex trading volume has continued to account for the dominant share (over 77%) of total
trading over this period, though there is an unmistakable downward trend in that
proportion. (Part of this dominance, though, result s from double-counting since purchase
and sales are added separately, and a single inter-bank transaction leads to a purchase as
well as a sales entry.) This is in keeping with global patterns.

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In March 2006, about half (48%) of the transactions were spot trades, while swap
transactions (essentially repurchase agreements with a one-way transaction – spot or
forward – combined with a longer- horizon forward transaction in the reverse direction)
accounted for 34% and forwards and forward cancellations made up 11% and 7%
respectively. About two-thirds of all transactions had the rupee on one side. In 2004,
according to the triennial central bank survey of foreign exchange and derivative markets
conducted by the Bank for International Settlements (BIS (2005a)) the Indian Rupee
featured in the 20th position among all currencies in terms of being on one side of all
foreign transactions around the globe and its share had tripled since 1998. As a host of
foreign exchange trading activity, India ranked 23rd among all countries covered by the
BIS survey in 2004 accounting for 0.3% of the world turnover. Trading is relatively
moderately concentrated in India with 11 banks accounting for over 75% of the trades
covered by the BIS 2004 survey.

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Features of the Forward premium on the Indian rupee
The two main functions of the foreign exchange market are to determine the price of the
different currencies in terms of one another and to transfer currency risk from more risk-
averse participants to those more willing to bear it. As in any market essentially the
demand and supply for a particular currency at any specific point in time determines its
price (exchange rate) at that point. However, since the value of a country’s currency has
significant bearing on its economy, foreign exchange markets frequently witness
government intervention in one form or another, to maintain the value of a currency at or
near its “desired” level. Interventions can range from quantitative restrictions on trade
and cross-border transfer of capital to periodic trades by the central bank of the country
or its allies and agents so as to move the exchange rate in the desired direction. In recent
years India has witnessed both kinds of intervention though liberalization has implied a
long-term policy push to reduce and ultimately remove the former kind. It is safe to say
that over the years since liberalization, India has allowed restricted capital mobility and
followed a “managed float” type exchange rate policy.
During the early years of liberalization, the Rangarajan committee recommended that
India’s exchange rate be flexible. Officially speaking, India moved from a fixed exchange
rate regime to “market determined” exchange rate system in 1993. The overt objective of
India’s exchange rate policy, according to various policy pronouncements, has been to
manage “volatility” in exchange rates without targeting any specific levels. This has been
hard to do in practice.
The Indian rupee has had a remarkably stable relationship with the US dollar. Meanwhile
the dollar appreciated against major currencies in the late 90’s and then went into an
extended decline particularly during 2003 and 2004. The lock-step pattern of the US
dollar and the Rupee is best reflected in the movements in the two currencies against
a third currency like the Euro. The correlation of the exchange rates of the two currencies
against the Euro during 1999-2004 was 0.94. Several studies have established the pegged
nature of the rupee in recent years (see Chakrabarti (2006) for a more detailed
discussion). Based on volatility, India had a de facto crawling peg to the US dollar
between 1979 and 1991 which changed to a de facto peg from mid-1991 to mid-1995,
with a major devaluation in March 1993. From mid-1995 to end-2001, the rupee reverted
to a crawling peg arrangement in practice. An analysis of the ratio of the variance of the
exchange rate to the sum of the variances of the interest rate and the foreign exchange
reserves reveals a move even closer to the fixed exchange rate system. A comparison of
the sensitivity (beta) of the Dollar-rupee rate with the Euro-rupee rate for a three year
period (1999 through 2001), indicates that India had a dollar beta of 1.01 – tenth highest
among the 53 countries considered. More importantly, the US dollar-Euro exchange rate
explained about 97% of all movements in the Indian rupee-Euro exchange rate – highest
among all the 53 countries considered. Clearly the Indian rupee has been an excellent
“tracker” of the US dollar.

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It is instructive to consider the Rupee-Dollar exchange rate in the light of the purchasing
power parity (PPP) holding that the exchange rate between two currencies should equal
the ratio of price levels in two countries. In its dynamic form PPP holds that that the rate
of depreciation of a currency should equal the excess of its inflation rate to that in the
other country. Over a reasonably long period of time, the devaluation in the Indian
Rupee, vis-à-vis the US dollar does seem to have an association with the difference in the
inflation rates in the two countries. Between 1991 and 2003, the two variables have had
visible co- movements with a correlation of about 0.57 (Chakabarti (2006)). This may be
a result of Indo-US trade flows dominating the exchange rate markets but it is perhaps
more likely that it reflects the exchange rate management principles of the monetary
authorities.
The Reserve Bank of India has used a varied mix of techniques in intervening in the
foreign exchange market – indirect measures such as press statements (sometimes called
“open mouth operations” in central bank speak) and, in more extreme situations,
monetary measures to affect the value of the rupee as well as direct purchase and sale in
the foreign exchange market using spot, forward and swap transactions (see Ghosh
(2002)). Till around 2002, the measures were mostly in the nature of crisis management
of saving-the-rupee kind and sometimes the direct deals would be repeated over several
days till the desired outcome was accomplished. Other public sector banks, particularly
the SBI often aided or veiled the intervention process.
The exact details of the interventions are shrouded in mystery, not unusual for central
banks ever wary of disclosing too much of their hand to the currency speculators. The
Tarapore Committee report had urged more transparency in the intervention process and
recommended, in 1997, that a ‘Monitoring Exchange Rate Band’ of ± 5% be used around
an announced neutral real effective exchange rate (REER), with weekly publication of
relevant figures, something yet to be implemented. In a recent survey on foreign
exchange market intervention in emerging markets, the Bank for International
Settlements (BIS (2005b)) found that out of 11 emerging market countries considered,
India gave out most complete information on intervention strategy (along with three
others); no information on actual interventions (five others did the same) and did not
cover foreign exchange intervention in annual reports (like two other countries). On the
whole it ranked fourth most opaque in matters of foreign exchange intervention among
the eleven countries compared.

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Regulation of cross-border currency flows
A feature of the economy that is intricately related with the exchange rate regime
followed is the freedom of cross-border capital flows. This relationship comes from the
so-called “impossible trinity” or “trilemma” of international finance, which essentially
states that a country may have any two but not all of the following three things – a fixed
exchange rate, free flow of capital across its borders and autonomy in its monetary
policy. Since liberalization, India has been having close to a de facto peg to the dollar and
simultaneously has been liberalizing its foreign currency flow regime.
Close on the heels of the adoption of market determined exchange rate (within limits) in
1993 came current account convertibility in 1994. In 1997, the Tarapore committee, on
Capital Account Convertibility, defined the concept as “the freedom to convert local
financial assets into foreign financial assets and vice versa at market determined rates of
exchange” and laid down fiscal consolidation, a mandated inflation target and
strengthening of the financial system as its three main preconditions.
Meanwhile capital flows have been gradually liberalized, allowing, on the inflow side,
foreign direct and portfolio investments, and tapping foreign capital markets by Indian
companies as well as considerably better remittance privileges for individuals; and on the
outflow side, international expansion of domestic companies. In 2000, the infamous
Foreign Exchange Regulation Act (FERA) was replaced with the much milder Foreign
Exchange Management Act (FEMA) that gave participants in the foreign exchange
market a much greater leeway.
The ultimate goal of capital account convertibility now seems to be within the
government’s sights and efforts are on to chalk out the roadmap for the last leg, though it
is not expected to be accomplished before 2009. Expectedly, the wisdom of the move has
been hotly debated . Advocates of convertibility cite the “consumption smoothing”
benefits of global funds flow and point out that it actually improves macroeconomic
discipline because of external monitoring by the global financial markets. Convertibility
can spur domestic investment and growth because of easier and cheaper financing. It can
also contribute to greater efficiency in the banking and financial systems. On the other
hand, skeptics like Williamson (2006), for instance, points out that India is yet to fulfill at
least one of the three major preconditions to Capital Account Convertibility set out by the
Tarapore committee, viz. fiscal discipline, with a public sector deficit of 7.6% of the GDP
and the ratio of public debt to GDP of over 83% in 2005-06. In any case, the argument
goes, the benefits of convertibility do not necessarily outweigh the risks and cross-border
short-term bank loans – usually the last item to be liberalized – are the most volatile. It is
generally held that it was, in fact, the lack of convertibility that protected India from
contamination during the Asian contagion in 1997-98.

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The Dynamics of Swelling Reserves
An important corollary of India’s foreign exchange policy has been the quick and
significant accumulation of foreign currency reserves in the past few years. Starting from
a situation in 1990-91 with foreign exchange reserves level barely enough to cover two
weeks of imports, and about $32 billion at the beginning of 2000, India’s foreign
exchange position rocketed to one of the largest in the world with over $155 billion in
mid-2006. Since 2000, this implies a compounded annual growth rate of about 28% with
the years 2003 and 2004 having the most stunning rises at 48% and 45% respectively.
During these two years the US dollar fell against the Euro by 19% and against the rupee
by 9%. Without RBI intervention, the latter figure is likely to have been larger and the
reserves accumulation less spectacular.
A sizable foreign exchange reserve acts as liquidity cover and protects against a run on
the country’s currency, and reduces the rate of interest on Indian debt in the world market
by lowering the country risk perception by international rating agencies. However,
beyond a point, it begins to affect the money supply in the country, and interest rates.
There are significant “sterilization costs” to avoid this and the RBI loses money by
earning low returns on the safe assets used to park the reserves. Given this low rate of
return, there has been discussion about the unique proposal to use part of the reserves to
fund infrastructure projects.

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Enforcement of Foreign Exchange Market
Classes of officers of Enforcement
There shall be the following classes of officers of Enforcement, namely:-
a. Directors of Enforcement;
b. Additional Directors of Enforcement;
c. Deputy Directors of Enforcement;
d. Assistant Directors of Enforcement and
e. such other class of officers of Enforcement as may be appointed for the purposes of
this Act.
Appointment and powers of officers of Enforcement
(a) The Central Government may appoint such persons as it thinks fit to be officers of
Enforcement.
(b) Without prejudice to the provisions of sub-section (1), the Central Government may
authorize a Director of Enforcement or an Additional Director of Enforcement or a
Deputy Director of Enforcement or an Assistant Director of Enforcement to appoint
officers of Enforcement below the rank of an Assistant Director of Enforcement.
(c) Subject to such conditions and limitations as the Central Government may impose, an
officer of Enforcement may exercise the powers and discharge the duties conferred or
imposed on him under this Act.

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Entrustment of functions of Director
The Central Government may, by order and subject to such conditions and limitations as
it thinks fit to impose, authorize any officer of customs or any Central Excise Officer or
any police officer or any other officer of the Central Government or a State Government
to exercise such of the powers and discharge such of the duties of the Director of
Enforcement or any other officer of Enforcement under this Act as may be specified in
the order.
Authorized dealers in foreign exchange
(a) The Reserve Bank may, on an application made to it in this behalf, authorize any
person to deal in foreign exchange.
(b) An authorization under this section shall be in writing and -
 may authorize transactions of all descriptions in foreign currencies or may
be restricted to authorizing dealings in specified foreign currencies only;
 may authorize dealings in all foreign currencies or may be restricted to
authorizing specified transactions only;
 may be granted to be effective for a specified period, or within specified
amounts;
 may be granted subject to such conditions as may be specified therein.
(c) Any authorization granted under sub-section (1) may be revoked by the Reserve Bank
at any time if the Reserve Bank is satisfied that, -
 it is in the public interest to do so; or
 the authorized dealer has not complied with the conditions subject to
which the authorization was granted or has contravened any of the
provisions of this Act or of any rule, notification, direction or order made
there under:
 Provided that no such authorization shall be revoked on the ground
specified in clause
 Unless the authorized dealer has been given a reasonable opportunity for
making a representation in the matter.

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(d) Any authorized dealer shall, in all his dealings in foreign exchange and in the exercise
and discharge of the powers and of the functions delegated to him under section 74,
comply with such general or special directions or instructions as the Reserve Bank may,
from time to time, think fit to give, and, except with the previous permission of the
Reserve Bank, an authorized dealer shall not engage in any transaction involving any
foreign exchange which is not in conformity with the terms of his authorization under this
section.
(e) An authorized dealer shall, before undertaking any transaction in foreign exchange on
behalf of any person, require that person to make such declarations and to give such
information as will reasonably satisfy him that the transaction will not involve, and is not
designed for the purpose of, any contravention or evasion of the provisions of this Act or
of any rule, notification, direction or order made there under, and where the said person
refuses to comply with any such requirement or makes only unsatisfactory compliance
therewith, the authorized dealer shall refuse to undertake the transaction and shall, if he
has reason to believe that any such contravention or evasion as aforesaid is contemplated
by the person, report the matter to the Reserve Bank.

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Money-changers
(a) The Reserve Bank may, on an application made to it in this behalf, authorize any
person to deal in foreign currency.
(b) An authorization under this section shall be in writing and -
i. may authorize dealings in all foreign currencies or may be restricted to
authorizing dealings in specified foreign currencies only;
ii. may authorize transactions of all descriptions in foreign currencies or may
be restricted to authorizing specified transactions only;
iii. may be granted with respect to a particular place where alone the money
changer shall carry on his business;
iv. may be granted to be effective for a specified period, or within specified
amounts;
v. may be granted subject to such conditions as may be specified therein.
(c) Any authorization granted under sub-section (1) may be revoked by the Reserve Bank
at any time if the Reserve Bank is satisfied that -
i. it is in the public interest to do so; or the money-changer has not complied
with the conditions subject to which the authorization was granted or
ii. has contravened any of the provisions of this Act or of any rule,
notification, direction or order made there under: Provided that no such
authorization shall be revoked on the ground specified in clause (ii) unless
the money-changer has been given a reasonable opportunity for making a
representation in the matter.
(d) The provisions of sub-sections (4) and (5) of section 6 shall, in so far as they are
applicable, apply in relation to a money-changer as they apply in relation to an authorized
dealer.

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Restrictions on dealing in foreign exchange
(a) Except with the previous general or special permission of the Reserve Bank, no
person other than an authorized dealer shall in India, and no person resident in India other
than an authorized dealer shall outside India, purchase or otherwise acquire or borrow
from, or sell, or otherwise transfer or lend to or exchange with, any person not being an
authorized dealer, any foreign exchange: Provided that nothing in this sub-section shall
apply to any purchase or sale of foreign currency effected in India between any person
and a money-changer.
(b) Except with the previous general or special permission of the Reserve Bank, no
person, whether an authorized dealer or a money-changer or otherwise, shall enter into
any transaction which provides for the conversion of Indian currency into foreign
currency or foreign currency into Indian currency at rates of exchange other than the rates
for the time being authorized by the Reserve Bank.
(c) Where any foreign exchange is acquired by any person, other than an authorized
dealer or a money-changer, for any particular purpose, or where any person has been
permitted conditionally to acquire foreign exchange, the said person shall not use the
foreign exchange so acquired otherwise than for that purpose or, as the case may be, fail
to comply with any condition to which the permission granted to him is subject, and
where any foreign exchange so acquired cannot be so used or the conditions cannot be
complied with, the said person shall, within a period of thirty days from the date on
which he comes to know that such foreign exchange cannot be so used or the conditions
cannot be complied with, sell the foreign exchange to an authorized dealer or to a money-
changer.
(d) For the avoidance of doubt, it is hereby declared that where a person acquires foreign
exchange for sending or bringing into India any goods but sends or brings no such goods
or does not send or bring goods of a value representing the foreign exchange acquired,
within a reasonable time or sends or brings any goods of a kind, quality or quantity
different from that specified by him at the time of acquisition of the foreign exchange,
such person shall, unless the contrary is proved, be presumed not to have been able to use
the foreign exchange for the purpose for which he acquired it or, as the case may be, to
have used the foreign exchange so acquired otherwise than for the purposes for which it
was acquired.
(e) Nothing in this section shall be deemed to prevent a person from buying from any
post office, in accordance with any law or rules made there under for the time being in
force, any foreign exchange in the form of postal orders or money orders.

23. 23
Restrictions on payments
(a) Save as may be provided in and in accordance with any general or special exemption
from the provisions of this sub-section which may be granted conditionally or
unconditionally by the Reserve Bank, no person in, or resident in, India shall -
 make any payment to or for the credit of any person resident outside India;
 Receive, otherwise than through an authorized dealer, any payment by
order or on behalf of any person resident outside in India.
Explanation - For the purposes of this clause, where any person in, or
resident in, India receives any payment by order or on behalf of any
person resident outside India through any other person (including an
authorized dealer) without a corresponding inward remittance from any
place outside India, then, such person shall be deemed to have received
such payment otherwise than through an authorized dealer;
 sraw, issue or negotiate any bill of exchange or promissory note or
acknowledge any debt, so that a right (whether actual or contingent) to
receive a payment is created or transferred in favour of any person resident
outside India;
 make any payment to, or for the credit of, any person by order or on behalf
of any person resident outside India;
 place any sum to the credit of any person resident outside India;
 make any payment to, or for the credit of, any person or receive any
payment for, or by order or on behalf of, any person as consideration for
or in association with
a. the receipt by any person of a payment or the acquisition by any person of
property outside India,
b. the creation or transfer in favour of any person of a right (whether actual
or contingent) to receive payment or acquire property outside India;
 draw, issue or negotiate any bill of exchange or promissory note, transfer
any security or acknowledge any debt, so that a right (whether actual or
contingent) to receive a payment is created or transferred in favour of any
person as consideration for or in association with any matter referred to in
clause

24. 24
(b) Nothing in sub-section (1) shall render unlawful -
 the making of any payment already authorized either with foreign
exchange obtained from an authorized dealer or a money-changer under
section 8 or with foreign exchange retained by a person in pursuance of an
authorization granted by the Reserve Bank;
 The making of any payment with foreign exchange received by way of
salary or payment for services not arising from any business in, or
anything done while in, India.
(c) Save as may be provided in, and in accordance with, any general or special exemption
from the provisions of this sub-section, which may be granted conditionally or
unconditionally by the reserve Bank, no person shall remit or cause to be remitted any
amount from any foreign country into India except in such a way that the remittance is
received in India only through an authorized dealer.
(d) Nothing in this section shall restrict the doing by any person of anything within the
scope of any authorization or exemption granted under this Act.
(e) For the purposes of this section and section 19, "security" includes coupons or
warrants representing dividends or interest and life or endowment insurance policies.

25. 25
Blocked accounts
(i) Where an exemption from the provisions of section 9 is granted by the Reserve Bank
in respect of payment of any sum to any person resident outside India and the exemption
is made subject to the condition that the payment is made to a blocked account -
 the payment shall be made to a blocked account in the name of that person
in such manner as the Reserve Bank may, by general or special order,
direct;
 the crediting of that sum to that account shall, to the extent of the sum
credited, be a good discharge to the person making the payment.
(ii) No sum standing at the credit of a blocked account shall be drawn on except in
accordance with any general or special permission, which may be granted conditionally
or otherwise by the Reserve Bank.
(iii) In this section, "blocked account" means an account opened, whether before or after
the commencement of this Act, as a blocked account at any office or branch in India of a
bank authorised in this behalf by the Reserve Bank, or an account blocked, whether
before or after such commencement, by order of the Reserve Bank.

26. 26
Restrictions on import and export of certain currency
(i) The Central Government may, by notification in the Official Gazette, order that,
subject to such exemption, if any, as may be specified in the notification, no person shall,
except with the general or special permission of the Reserve Bank and on payment of the
fee, if any, prescribed, bring or send into India any foreign exchange or any Indian
currency.
Explanation - For the purposes of this sub-section, the bringing or sending into any port
or place in India of any such article as aforesaid intended to be taken out of India without
being removed from the ship or conveyance in which it is being carried shall nonetheless
be deemed to be a bringing, or, as the case may be, sending, into India of that article.
(ii) No person shall, except with the general or special permission of the Reserve Bank or
the written permission of a person authorized in this behalf by the Reserve Bank, take or
send out of India any Indian currency or foreign exchange other than foreign exchange
obtained by him from an authorized dealer or from a money-changer.
Acquisition by Central Government of foreign exchange
The Central Government may, by notification in the Official Gazette, order every person
in, or resident in, India -
(a) who owns or holds such foreign exchange as may be specified in the notification, to
offer it, or cause it to be offered, for sale to the Reserve Bank on behalf of the Central
Government or to such person, as the Reserve Bank may authorize for the purpose, at
such price as the Central Government may fix, being a price which is not less than the
price calculated at the rate of exchange for the time being authorized by the Reserve
Bank;
(b) who is entitled to assign any right to receive such foreign exchange as may be
specified in the notification, to transfer that right to the Reserve Bank on behalf of the
Central Government on payment of such consideration therefore as the Central
Government may fix having regard to the rate for the time being authorized by the
Reserve Bank in pursuance of sub-section (2) of section 8 for conversion into Indian
currency of the foreign currency in which such foreign exchange is expressed:
Provided that the Central Government may, by the said notification or by a separate
order, except any person or class of persons from the operation of the order made in the
said notification: Provided further that nothing in this section shall apply to any foreign
exchange acquired by a person from an authorized dealer or from a money-changer and
retained by him with the permission of the Reserve Bank for any purpose.

27. 27
Duty of persons entitled to receive foreign exchange
(i) No person who has a right to receive any foreign exchange or to receive from a person
resident outside India a payment in rupees shall, except with the general or special
permission of the Reserve Bank, do or refrain from doing anything, or take or refrain
from taking any action, which has the effect of securing -
 that the receipt by him of the whole or part of that foreign exchange or payment is
delayed, or
 that the foreign exchange or payment ceases in whole or in part to be receivable
by him.
(ii) Where a person has failed to comply with the requirements of sub-section (1) in
relation to any foreign exchange or payment in rupees, the Reserve Bank may give to him
such directions as appear to be expedient for the purposes of securing the receipt of the
foreign exchange or payment, as the case may be.
Payment for exported goods
(i) (a) The Central Government may, by notification in the Official Gazette, prohibit the
taking or sending out by land, sea or air (hereafter in this section referred to as export) of
all goods or of any goods or class of goods specified in the notification from India
directly or indirectly to any place so specified unless the exporter furnishes to the
prescribed authority a declaration in the prescribed form supported by such evidence as
may be prescribed or so specified and true in all material particulars which, among
others, shall include the amount representing -
(ii) the full export value of the goods; or
(iii) if the full export value of the goods is not ascertainable at the time of export, the
value which the exporter, having regard to the prevailing market conditions, expects to
receive on the sale of the goods in the overseas market, and affirms in the said declaration
that the full export value of the goods (whether ascertainable at the time of export or not)
has been, or will within the prescribed period be, paid in the prescribed manner.
(b) If the Central Government is of opinion that it is necessary or expedient in the public
interest so to do, it may, by notification in the Official Gazette, specify any goods, from
among those goods to which a notification under clause (a) applies, and direct that in
respect of the goods so specified, where an exporter makes a declaration under sub-clause
(ii) of clause (a) of the value which he, having regard to the prevailing market conditions
expects to receive on the sale of such goods in the overseas market, he shall not, except
with the permission of the Reserve Bank on an application made to the Reserve Bank by
the exporter in this behalf, authorize or permit or allow or in any manner be a party to, the
sale of such goods for a value less than that declared.

28. 28
Provided that no permission shall be refused by the Reserve Bank under this clause
unless the exporter has been given a reasonable opportunity for making a representation
in the matter: Provided further that where the exporter makes an application to the
Reserve Bank for permission under this clause and the Reserve Bank does not, within a
period of twenty days from the date of receipt of the application, communicate to the
exporter that permission applied for has been refused, it shall be presumed that Reserve
Bank has granted such permission.
Where any export of goods, to which a notification under clause (a) of sub-section (1)
applies, has been made, no person shall, except with the permission of the Reserve Bank,
do or refrain from doing anything, or take or refrain from taking any action, which has
the effect of securing -
(A) in a case falling under sub-clause (i) or sub-clause (ii) of clause (a) of sub-section
(1),-
(a) that payment for the goods -
 is made otherwise than in the prescribed manner, or
 is delayed beyond the period prescribed under clause (a) of sub-section (1), or
(b) that the proceeds of sale of the goods exported do not represent the full export value
of the goods subject to such deductions, if any, as may be allowed by the Reserve Bank;
and
(B) in a case falling under sub-clause (ii) of clause (a) of sub-section (1), also that the sale
of the goods is delayed to an extent which is unreasonable having regard to the ordinary
course of trade: Provided that no proceedings in respect of any contravention of the
provisions of this sub-section shall be instituted unless the prescribed period has expired
and payment for the goods representing the full export value has not been made in the
prescribed manner within the prescribed period.
(3) Where in relation to any goods to which a notification under clause (a) of sub-section
(1) applies the prescribed period has expired and payment therefore has not been made as
aforesaid, it shall be presumed, unless the contrary is proved by the person who has sold
or is entitled to sell the goods or to procure the sale thereof, that such person has not
taken all reasonable steps to receive or recover the payment for the goods as aforesaid
and he shall accordingly be presumed to have contravened the provisions of sub-section
(2).
(4) Where in relation to any goods to which a notification under clause (a) of sub-section
(1) applies the prescribed period has expired and payment therefor has not been made as
aforesaid, the Reserve Bank may give to any person who has sold the goods or who is
entitled to sell the goods or procure the sale thereof, such directions as appear to it to be
expedient for the purpose of securing -

29. 29
(i) if the goods have been sold, the payment therefor, or
(ii) if the goods have not been sold, either the sale of the goods and payment therefor as
aforesaid, or the re-import of the goods into India as the circumstances permit, within
such period as the Reserve Bank may specify in this behalf and without prejudice to the
generality of the foregoing provision, may direct that the goods, the right to receive the
payment therefor or any other right to enforce such payment shall be transferred or
assigned to the Central Government or to a person specified in the directions.
(5) Where any goods or a right to receive payment or any other right to enforce such
payment, are or is transferred or assigned in accordance with sub-section (4), the Central
Government shall pay to the person transferring or assigning the same, the amount
recovered by or on behalf of the Central Government in respect of the goods, after
deducting all costs, charges and expenses incurred by the Central Government in selling
the goods or in recovering or realising the amount in respect of such goods.
Payment for lease, hire or other arrangement
No person shall, except with the general or special permission of the Reserve Bank, take
or send out by land, sea or air any goods from India to any place on lease or hire or under
any arrangement other than sale or disposal in any other manner of such goods.

30. 30
Regulation of export and transfer of securities
(1) Notwithstanding anything contained in section 81 of the Companies Act, 1956, no
person shall, except with the general or special permission of the Reserve Bank,
a. take or send any security to any place outside India;
b. transfer any security, or create or transfer any interest in a security, to or in favour
of a person resident outside India;
c. Deleted by Act 29 of 1993;
d. issue, whether in India or elsewhere, any security which is registered or to be
registered in India, to a person resident outside India;
e. Acquire, hold or dispose of any foreign security.
(2) Where the holder of a security is a nominee, neither he nor any person through whose
agency the exercise of all or any of the holder's rights in respect of the security is
controlled shall, except with the general or special permission of the Reserve Bank, do
any act, whereby he recognizes or gives effect to the substitution of another person as the
person from whom he directly receives instructions, unless both the person previously
instructing and the person substituted for that person were, immediately before the
substitution, resident in India.
(3) The Reserve Bank may, for the purpose of securing that the provisions of this section
are not evaded, require that the person transferring any security and the person to whom
such security is transferred shall subscribe to a declaration that the transferee is not
resident outside India.
(4) Notwithstanding anything contained in any other law, no person shall, except with the
permission of the Reserve Bank, -
a. enter any transfer of securities in any register or book in which securities are
registered or inscribed if he has any ground for suspecting that the transfer
involves any contravention of the provisions of this section, or
b. enter in any such register or book, in respect of any security whether in
connection with the issue or transfer of the security or otherwise, an address
outside India except by way of substitution for any such address in the same
country or for the purpose of any transaction for which permission has been
granted under this section with knowledge that it involves entry of the said
address.

31. 31
Restrictions on issue of bearer securities
Except with the general or special permission of the Reserve Bank, no person shall, in
India, and no person resident in India shall, outside India, create or issue any bearer
certificate or coupon or so alter any document that it becomes a bearer certificate or
coupon.
Restriction on settlement
No person resident in India shall, except with the general or special permission of the
Reserve Bank, settle, or make a gift of, any property so that a person who at the time of
the settlement or the making of the gift is resident outside India, elsewhere than in the
territories notified in this behalf by the Reserve Bank, will have an interest in the
property, or exercise any power for payment in favour of a person who at the time of the
exercise of the power is resident outside India elsewhere than in such notified territories:
Provided that any settlement or gift made or any power exercised as aforesaid without the
permission of the Reserve Bank shall not be invalid merely on the ground that such
permission has not been obtained.

32. 32
Restriction on acquisition, holding, etc., of immovable property in India
(1) No person who is not a citizen of India and no company (other than a banking
company) which is not incorporated under any law in force in India shall, except with the
previous general or special permission of the Reserve Bank, acquire or hold or transfer or
dispose of by sale, mortgage, lease, gift, settlement or otherwise any immovable property
situate in India:
Provided that nothing in this sub-section shall apply to the acquisition or transfer of any
such immovable property by way of lease for a period not exceeding five years.
(2) Any person or company referred to in sub-section (1) and requiring a special
permission under that sub-section for acquiring, or holding, or transferring, or disposing
of, by sale, mortgage, lease, gift, settlement or otherwise any immovable property situate
in India may make an application to the Reserve Bank in such form and containing such
particulars as may be specified by the Reserve Bank.
(3) On receipt of an application under sub-section (2), the Reserve Bank may, after
making such inquiry as it deems fit, either grant or refuse to grant the permission applied
for: Provided that no permission shall be refused unless the applicant has been given a
reasonable opportunity for making a representation in the matter: Provided further that if
before the expiry of a period of ninety days from the date on which the application was
received by the Reserve Bank, the Reserve Bank does not communicate to the applicant
that the permission applied for has been refused, it shall be presumed that the Reserve
Bank has granted such permission.
Explanation - In computing the period of ninety days for the purposes of the second
proviso, the period, if any, taken by the Reserve Bank for giving an opportunity to the
applicant for making a representation under the first proviso shall be excluded.
(4) Every person and company referred to in sub-section (1) holding at the
commencement of this Act any immovable property situate in India shall, before the
expiry of a period of ninety days from such commencement or such further period as the
Reserve Bank may allow in this behalf, make a declaration in such form as may be
specified by the Reserve Bank regarding the immovable property or properties held by
such person or company.

33. 33
Power to search suspected persons and to seize documents
(1) If any officer of Enforcement authorized in this behalf by the Central Government, by
general or special order, has reason to believe that any person has secreted about his
person or in anything under his possession, ownership or control any documents which
will be useful for, or relevant to, any investigation or proceeding under this Act, he may
search that person or such thing and seize such documents.
(2) When any officer of Enforcement is about to search any person under the provisions
of this section, the officer of Enforcement shall, if such person so requires, take such
person without unnecessary delay to the nearest gazetted officer of Enforcement superior
in rank to him or a magistrate.
(3) If such requisition is made, the officer of Enforcement may detain the person making
it until he can bring him before the gazetted officer of Enforcement or the magistrate
referred to in sub-section (2).
(4) The gazetted officer of Enforcement or the magistrate before whom any such person
is brought shall, if he sees no reasonable ground for search, forthwith discharge the
person but otherwise shall direct that search be made.
(5) Before making a search under the provisions of this section, the officer of
Enforcement shall call upon two or more persons to attend and witness the search and
may issue an order in writing to them or any of them so to do; and the search shall be
made in the presence of such persons and a list of all documents seized in the course of
such search shall be prepared by such officer and signed by such witnesses.
(6) No female shall be searched by any one excepting a female.

34. 34
CHAPTER 5: Conclusion
Liberalization has transformed India’s external sector and a direct beneficiary of this has
been the foreign exchange market in India. From a foreign exchange-starved, control-
ridden economy, India has moved on to a position of $150 billion plus in international
reserves with a confident rupee and drastically reduced foreign exchange control. As
foreign trade and cross-border capital flows continue to grow, and the country moves
towards capital account convertibility, the foreign exchange market is poised to play an
even greater role in the economy, but is unlikely to be completely free of RBI
interventions any time soon.

35. 35
Bibliography
http://www.rbi.org.in
http://en.wikipedia.org
http://www.investopedia.com
http://www.yourarticlelibrary.com
http://www.preservearticles.com